Valuing Art in New York Divorces Remains a Nebulous Affair

In the context of a divorce, New York is an equitable distribution state (as codified in the Domestic Relations Law). Under longstanding case law, equitable does not necessarily mean equal. Assets of the marriage are first identified, then characterized as marital property (subject to equitable distribution) or separate property (not subject to equitable distribution) and ultimately valued so that the court can fashion an appropriate division. Valuing assets during a divorce is a fairly routine part of any matter.

As you might expect, there is a spectrum across which marital assets fall regarding the ease with which they can be valued with reasonable certainty. Putting aside cash and cash equivalents, real property and vehicles are easier to value than, for example, ownership interests in a business or stock options. To the extent there is a public market for a particular asset (e.g., stock held in a publicly traded corporation), ascertaining the value is relatively straightforward as it is dictated by the market itself. A share of stock in Apple can be sold and you know exactly what you will receive for it. Illiquid assets, such as private equity fund interests, which are not traded on any open, public exchange are harder to value.

For that reason, art is one of the more difficult marital assets to value as it is illiquid, trading in what can be viewed as an opaque market, and subject to different valuation standards. As highlighted by a recent high-profile case, the foregoing can result in a difficult and contentious valuation process.

Competing Standards

Valuing art is complex on its own, but further complicated by two competing standards

When valuing assets like real property, valuation experts are typically awash in comparables given the high volume of transactions. With accessible resources such as Zillow that provide information about real property sales, many of us can play “armchair valuation expert.”
Individual pieces of art on the other hand are unique, trade in a far smaller amount by volume, and there is little accessibility to provide insight as to a piece’s true market value.

A hypothetical example shows the challenges presented with valuing art. Imagine an artist creates five paintings in a series. One was sold at auction 12 years ago; another was sold five years ago. In the time since the sale of the second painting, the artist has received more critical acclaim than he or she had before. A divorcing couple owns one painting from the series—which is widely viewed as the least inspired of the five—and must value it as part of their divorce.

Valuation experts can look at the artist’s previous sales from this series or ones from other series as part of their valuation process. They can also look at sales prices for similar pieces. That is assuming, of course, that records of those sales are public. But how would the artist’s recent critical acclaim affect the price? What about the fact that this piece is not held in as high regard as other pieces in the series? What role does inflation play in the piece’s value? Are there additional factors that may affect the value, such as the artist having said things earlier in their career that today we would deem politically incorrect?

Establishing one valuation can be hard enough, but it will be up to a judge to decide which of two competing valuations will be the operative one. Adding complexity here is the existence of two different methodologies for valuing art.

The first is fair market value. Under this method, value is based on a hypothetical sale of a piece, at arm’s length, between a willing buyer and a willing seller. The cost of the transaction would not be factored in, such as the cost to ship the art or insure it. However, the buyer’s premium would be included in the fair market value, as the value is based on the price a buyer would pay for the item and not the net amount the seller would receive from the sale. Case law (Culman v. Boesky, 207 A.D.3d 18 (1st Dep’t 2022)), the Appraisers Association of America, and the Internal Revenue Service (through the ruling in Estate of Scull v Commissioner, T.C. Memo 1994-211) support utilizing fair market value including the buyer’s premium as the standard for valuing art.

The second method is the marketable cash value. Under this method, the value is that which a seller would realize, net of expenses (such as commissions, shipping, and insurance) if they sold the piece of art in a competitive open market to a willing buyer without either party having been forced to buy or sell the piece.

Though they sound similar, the two valuations can produce materially different results, particularly because the expenses connected to the sale of a piece of art, including commissions, typically increase as the sales price increases.

Courts Struggle With Valuations

Over the course of two auctions in November 2021 and May 2022, Sotheby’s New York auctioned 65 pieces of art belonging to New York City real estate developer Harry Macklowe and his wife Linda Macklowe. Together, the two auctions brought in a remarkable $922.2 million—a record for Sotheby’s. That the auctions occurred at all is a testament to the difficulty of valuing art during divorces.

Harry and Linda Macklowe were married in January 1959. Over the course of their 59-year marriage, as Harry Macklowe became one of the premier real estate developers in New York City, the couple amassed a collection of 165 pieces of art. After Linda filed for divorce in July 2016, it fell to New York Supreme Court Judge Laura Drager, in a December 2018 opinion (Macklowe v. Macklowe, 2018 N.Y. Slip Op 51834(U) (Dec. 13, 2018)), to determine how to equitably distribute these marital assets.

The parties hired competing valuation experts who could not agree on the valuation method to employ. Harry and his expert argued the court should use the fair market value method, while Linda and her expert argued that the court should use the marketable cash value method. Both experts used comparable public auctions sales data to determine a piece’s value, but Harry’s expert also used other data, such as private sales information and insurance valuations.

Judge Drager did not credit one valuation method over the other. Instead, she took three different valuation approaches to three different groups of art.

For the 86 pieces where the experts agreed on the value or the value attributed by each “was sufficiently close,” Judge Drager valued each piece at the mid-point between the two appraisals. She noted that while “averaging expert appraisals is frowned upon unless the court can articulate its reason for doing so,” she recognized that “appraisal of art is inexact and that the differences between the two values” were “inconsequential given the overall value attributed by each expert for that individual piece.”

For the 15 pieces where only one party provided a valuation, the court accepted the valuation.

The remaining 64 pieces of art, however, had such large disparities in the experts’ valuations of them that the court could not assign a value. For example, the valuations for the sculpture Le Nez by Alberto Giacometti differed by $30 million—$65 million versus $35 million. The valuations for Number 17 by Jackson Pollock differed by $20 million—$35 million versus $15 million.

When it came time to equitably distribute the couple’s art collection, Judge Drager found it would be impossible to distribute the art entirely to one party based on its expected value, nor would it be equitable to do so given each party’s participation in amassing the collection. Instead, Judge Drager awarded Linda the pieces of art from the first two categories of art above—minus an Andy Warhol piece valued by the parties at $50 million. The pieces Linda received were valued at $39.96 million; Harry received a corresponding credit for $19.9 million.

Then, based on the inability for the parties’ experts to agree on the valuations of the remaining 64 pieces of art, and the resulting difficulty she faced in valuing them, Judge Drager ordered those pieces and the Warhol piece to be auctioned off and for the parties to divide the net proceeds equally among them. In doing so, she ultimately relied on the free market to determine the values of these pieces.

Based on the parties’ valuations, the sales were expected to bring in between $625.65 million and $788.7 million. The $922.2 million in sales from the Sotheby’s auction represented an increase of between 17% and 47% over those projections.

Valuing art is difficult, regardless of the art valued, and Macklowe shows how nebulous art valuations can be. Putting aside Judge Drager’s inability to rely on expert valuations, the prices realized at auction demonstrate how hard it is for even the most credentialed art valuation experts to accurately value art.

For example, Le Nez was valued at $35 million and $65 million by the parties’ experts in the case, but fetched $78.4 million—an increase of 124% and approximately 21%, respectively.

Number 17 was valued at between $15 and $35 million by the parties’ experts, but was sold for $61.2 million—an increase of 300% and 75%, respectively.

Andy Warhol’s Nine Marilyns was valued by the parties at $50 million, but brought in $47.4 million, a decrease of roughly 5%.

The Macklowe art collection was reported to be the most valuable art collection ever sold at auction and as such is an outlier. But at the same time, it is symbolic of how divorcing parties of any net worth, their experts, and courts can struggle with valuing art for the purposes of equitably distributing it.

Perhaps the only certainty in valuing art during a divorce is that uncertainty will surely abound.

Peter R. Stambleck is a founding partner of Mosberg Sharma Stambleck Gross LLP, a leading Manhattan matrimonial law firm specializing in representing high-net-worth individuals and other professionals in their divorces. He can be reached at stambleck@mssglaw.com.

Reprinted with permission from the October 16, 2023, edition of the New York Law Journal © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.